Taseko Mines: Copper Mega-Growth Story, Par Excellence

There is perhaps no greater trend emerging than the growth of electricity consumption and power generation. China this year will add 80GW of generation after adding 95GW in 2007. India's entire electric capacity is a mere 135GW, leaving the country roughly 17% deficient during peak hours. India will need to build out 80GW of generation by 2012 just to break even. News emerged this month that South Africa is experiencing severe power shortages and Vietnam is struggling with brown outs.

Outside of emerging markets, developed countries, too, are building out new power generation in the form of wind, solar, and fuel cell technologies. Korea Electric Power, which imported 17% of its coal from China last year, is scrambling for alternative sources after China announced an end to coal exports last month (Suntech Power just opened its first office in Korea this month and a KEPCO subsidiary has been buying fuel cells from Fuel Cell Technology for the last 6 months). Leave Asia, take a drive through Scandinavia, and you'll see the consistent build out of new wind farms, both on land and off-shore.

The bottom line is this: Emerging markets are building out electricity grids on a scale never before witnessed and developing markets are making the shift to alternative forms of energy. The facilitator of this mega-trend is: Copper. In regards to wind and solar energy, each requires 5-10 times the amount of copper as a traditional coal-fired plant. The data is not concise, but annual copper consumption ranges somewhere between 26 billion lbs. to 35 billion lbs. If we take the low end of 26 billion lbs. and factor 3% growth, copper miners need to increase production 780 million lbs a year to keep pace with global GDP. If you speak to leaders within the industry, they'll tell you there are no mines coming online now or in the future that can meet this demand.

Enter Taseko Mines (TGB). Taseko is a copper mining company in the sweet spot of this mega-trend. Having literally turned the lights on at their moth-balled Gibraltar mine back in 2003, they have consistently produced about 50 million lbs. of copper a year, while generating cash flow and profits each quarter.

At the same time they have enhanced their reserves to create a mine with a 16-18 year mine life-span producing 120 million lbs. a year. The mine's concentrator expansion is nearly complete and production for calendar year '08 is expected to be in the range of 80-90 million lbs. Calendar year '09 production is expected to be 110 million lbs. before leveling off at 120 million lbs.

What's remarkable is that the growth in reserves and production has been funded by cash flow. Taseko has no debt, over $80 million in working capital and trades at 10x trailing earnings. If you believe the macro copper story, then $3 copper is here to stay. At $3 copper (currently $3.60), TGB will earn roughly $0.85 in calendar year '08 and $1.17 in calendar year '09, leaving the stock trading at just 4.5 x and 3.2 x respective forward earnings.

Last week's earnings showed TGB was on track to hit its targets and production is ramping up. Copper plus production growth at this price puts TGB in the sweet spot of this mega-trend.

Disclosure: Long TGB

Comments

[tjschoenlein:]

Interesting article. I did my home work on this company and I could not agree more with the author.
The company took over the Gibraltar mine when copper was at 0.60 a pound. What a steal for Taseko management. NO debt, making money, solid - experience management team, low p/e. China has an open door policy for this copper mine. I see it at $6.75 + within 12-18 months at the rate it growing.. just a Missouri boy view.

2008 Feb 19 08:00 PM

[doubtful:]

I don't understand the volatility in this stock. Who is running it up and down 20% and more in a weeks time? I met w. mgmt. several times in mining conferences and am impressed - good story. I am a LT holder and buyer under $3.80

2008 Feb 20 12:48 AM

[Tou Tzu:]

Well researched and excellent macro thinking. Investing in Global Inflation and, specifically, the demand of 2.4 billion people in India and China, is the only theme I have conviction in.

Any thoughts on Suntech Power?

I'll be adding to my TGB position.

2008 Feb 20 03:03 PM

[Roylin:]

A well-known China investment counsellor says sell Sun Tech which has rocketed upwards over the past year (and 165% in 4 months!). Also China gov't is going to reign-in prices from energy producers and many other things... yes, price controls to fight increasing inflation pressures. However, coal is looking interesting.

2008 Mar 12 08:50 PM

[User 163486:]

I wanted to read the comments, before making a comment, but alas they are nowhere to be found.

What I find interesting about the article is that it is about a copper company being in an excellent position to cash in on the forced march into alternative energy sources, when the bigger story is the alternative energy sources themselves, which have become mandatory for economic survival.

The USA, with a little leadership and foresight, completely lacking in the last 7+ years could cash in on this obvious world market. Such a move would create millions of jobs at home at the expense of our enemies in the Middle East. Borrowing money from China to buy oil is just plain madness. If that money were pumped into CIGS (Copper indium gallium selenide, also see CIS), tidal energy capture, wind, geothermal, yes even nuclear power plants, at least for the time being. If the US doesn't take the lead in this technology soon, we will be left at the station by Germany, Japan and others. C'mon Bush, get with it, pal! Whose side are you on?

2008 Mar 13 02:20 PM

[User 163486:]

What I find interesting about the article is that it addresses a copper company being in an excellent position to cash in on the forced march into alternative energy sources, when the bigger story is the alternative energy sources themselves, now having become mandatory for economic survival.

The USA, with a little leadership and foresight, completely lacking in the last 7+ years, could cash in on this obvious world market, but time is getting short and the guy that could change direction on a dime still has 10 months in office. Such a move would create millions of jobs at home at the expense of our enemies in the Middle East. Borrowing money from China to buy oil is just plain madness. If that money were pumped into CIGS (Copper indium gallium serenade, also see CIS), tidal energy capture, wind, geothermal, yes even nuclear power plants, at least for the time being, we could compete in world markets. If the US doesn't take the lead in this technology soon, we will be left at the station by Germany, Japan and others. C'mon Bush, get with it, pal! Whose side are you on?

2008 Mar 13 02:32 PM

[NOWHEREMAN:]

Bought TGB when it was at $2.64 will sell half when it spikes up to $8 later this year. The rest will be held indefinitely as their Gold prospect evolves.

They are in the process of doubling their copper production and when the housing depression ends, don't look for copper prices to decline.

But TGB is only one egg and I am following a couple of others...like the next Monsanto(I hope).

2008 Mar 30 12:29 PM